NPAs, Stressed Assets & Recovery: Revision and Practice

How the four lessons connect#

The module follows the life cycle of credit deterioration:

Performing loan
↓
Overdue / SMA
↓
NPA recognition
↓
Sub-standard / Doubtful / Loss
↓
Provisioning and income-recognition consequences
↓
Resolution / Restructuring
↓
Settlement / Write-off / ARC transfer
↓
Recovery through SARFAESI / DRT / IBC / other routes

The most important idea is:

NPA management is not just "recover bad loans". It is a complete prudential system of early recognition, truthful accounting, loss provisioning, viable resolution and lawful recovery.

Common Confusions#

1. Overdue vs NPA#

Overdue begins when payment is missed.

NPA begins only when the applicable regulatory recognition threshold is crossed.

2. SMA vs NPA#

SMA = early stress.

NPA = non-performing classification.

3. Standard vs performing forever#

Standard means currently performing under regulatory rules, not risk-free.

4. Sub-standard vs doubtful#

Sub-standard = NPA up to 12 months.

Doubtful = remains sub-standard beyond 12 months.

5. NPA vs loss asset#

Every loss asset is severely impaired, but every NPA is not immediately a loss asset.

6. Provision vs write-off#

Provision = recognise expected loss.

Write-off = remove asset from active accounting books.

7. Write-off vs waiver#

Write-off does not automatically cancel borrower liability.

Waiver releases/forgives debt.

8. Restructuring vs evergreening#

Restructuring = genuine viable modification under rules.

Evergreening = artificial arrangement to hide stress.

9. Default vs wilful default#

Default can arise from genuine inability.

Wilful default involves deliberate/censurable conduct under RBI's framework.

10. Wilful default vs fraud#

They can overlap but are different legal/regulatory concepts.

11. Recovery vs resolution#

Recovery focuses on collecting dues.

Resolution can reorganise debt/business to preserve value.

12. SARFAESI vs DRT#

SARFAESI = secured-creditor enforcement law.

DRT = tribunal mechanism for debt recovery and SARFAESI challenges.

13. DRT vs DRAT#

DRT = first tribunal.

DRAT = appellate tribunal.

14. SARFAESI vs IBC#

SARFAESI focuses on security enforcement.

IBC is a collective insolvency-resolution framework.

15. ARC vs bank#

ARC acquires/resolves stressed assets.

It is not a normal deposit-taking commercial bank.

16. ARC sale vs loan waiver#

Sale transfers creditor's interest.

It does not automatically forgive borrower debt.

17. Haircut vs fraud#

Haircut is economic loss accepted in resolution.

It does not by itself prove fraud.

18. Gross NPA vs Net NPA#

Gross NPA = total recognised NPAs before specified provision adjustments.

Net NPA = residual NPA burden after specified adjustments.

Important Exam Facts to Revise#

1. A term loan normally becomes NPA when principal/interest is overdue for more than 90 days.
2. Bills purchased/discounted become NPA after more than 90 days overdue.
3. CC/OD uses the "out of order" test.
4. Short-duration crop loans use a two-crop-season rule.
5. Long-duration crop loans use a one-crop-season rule.
6. Asset classification is generally borrower-wise.
7. Interest on NPAs is not recognised like normal accrued interest.
8. Sub-standard asset = NPA for up to 12 months.
9. Doubtful asset = remains sub-standard for 12 months.
10. Loss asset = loss identified but not fully written off.
11. Secured sub-standard provisioning is currently 15% for commercial banks.
12. Unsecured sub-standard exposure attracts higher provision.
13. Doubtful unsecured portion requires 100% provision.
14. Doubtful secured portion provision rises with time.
15. Loss asset should be written off or 100% provided.
16. SMA-0 = overdue up to 30 days.
17. SMA-1 = overdue >30 to 60 days.
18. SMA-2 = overdue >60 to 90 days.
19. SMA is an early-stress category, not yet NPA.
20. CRILC tracks large-credit stress/default information.
21. RBI Prudential Framework provides a 30-day review period after default.
22. ICA threshold under the framework is 75% by value and 60% by number.
23. Restructuring modifies terms because borrower faces financial difficulty.
24. Compromise settlement is a negotiated full-and-final settlement under policy.
25. Technical write-off does not automatically stop recovery.
26. Write-off and waiver are different.
27. Wilful default is not the same as ordinary default.
28. Current wilful-default framework examines NPA accounts of ₹25 lakh and above.
29. SARFAESI Act was enacted in 2002.
30. Section 13(2) SARFAESI demand notice gives 60 days.
31. DRT can hear challenges to SARFAESI measures.
32. DRTs arise from the Recovery of Debts and Bankruptcy Act, 1993.
33. IBC was enacted in 2016.
34. NCLT is the adjudicating authority for corporate insolvency.
35. CIRP has a 180-day statutory base period.
36. CoC is central to corporate insolvency resolution.
37. IBC may end in resolution or liquidation.
38. ARC stands for Asset Reconstruction Company.
39. ARCs are regulated by RBI under the SARFAESI framework.
40. ARCs can acquire stressed financial assets.
41. Security Receipts represent interest in ARC/trust recovery structures.
42. ARC sale does not waive borrower liability.
43. A recovery haircut is not automatically evidence of wrongdoing.
44. Loan recovery must follow lawful/fair procedures.
45. Early recognition and resolution generally preserve more value than delayed recovery.

Module Recap#

Credit risk begins before NPA.

The progression usually looks like:

• missed payment;
• SMA;
• NPA;
• sub-standard;
• doubtful;
• loss.

RBI's IRACP framework forces banks to:

• recognise stress;
• stop overstating income;
• classify assets honestly;
• provide for expected losses.

A stressed loan may then be:

• regularised;
• restructured;
• settled;
• written off;
• sold to an ARC;
• recovered through SARFAESI/DRT;
• taken into insolvency under IBC.

The distinction among these tools matters.

The central principle is:

recognition is accounting, resolution is economic restructuring, recovery is collection/enforcement, and write-off is not the same as waiver.

Glossary#

ARC - Asset Reconstruction Company.

Asset Classification - Regulatory categorisation of loans according to performance and credit quality.

Cash Basis - Income recognition only when cash is actually realised.

CIRP - Corporate Insolvency Resolution Process under IBC.

CoC - Committee of Creditors.

Compromise Settlement - Negotiated arrangement where lender agrees to accept an agreed settlement amount in full and final settlement under the applicable policy.

CRILC - Central Repository of Information on Large Credits.

Default - Failure to pay/perform a contractual obligation when due.

Doubtful Asset - NPA that has remained sub-standard for the prescribed period.

DRAT - Debts Recovery Appellate Tribunal.

DRT - Debts Recovery Tribunal.

Evergreening - Artificial arrangement intended to make a stressed account appear regular without genuine economic recovery.

Gross NPA - Total recognised NPAs before specified provision adjustments.

Haircut - Difference between creditor claim and recovery/accepted resolution value.

IBC - Insolvency and Bankruptcy Code, 2016.

ICA - Inter-Creditor Agreement.

IRACP - Income Recognition, Asset Classification and Provisioning.

Loss Asset - Asset where loss has been identified but not completely written off.

NCLAT - National Company Law Appellate Tribunal.

NCLT - National Company Law Tribunal.

Net NPA - NPA exposure after specified provisions/adjustments.

NPA - Non-Performing Asset.

Out of Order - RBI classification test for revolving facilities such as CC/OD.

Overdue - Amount not paid on the due date fixed by the bank.

Provision - Accounting recognition/buffer for expected or identified asset loss.

Prudential Framework - RBI's framework for timely resolution of stressed assets.

Recovery Certificate - DRT-issued certificate used for recovery of adjudicated debt.

Resolution Plan - Plan for resolving borrower stress, potentially including restructuring, sale, ownership change or other measures.

SARFAESI - Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

Security Receipt - Instrument issued in ARC securitisation/reconstruction structure representing interest in underlying realisation.

Slippage - Movement of a standard asset into NPA.

SMA - Special Mention Account.

SMA-0 - Early stress category for overdue up to 30 days under current framework.

SMA-1 - Overdue more than 30 and up to 60 days.

SMA-2 - Overdue more than 60 and up to 90 days.

Standard Asset - Performing asset carrying normal risk for its category.

Stressed Asset - Broad term for loan showing financial stress, whether or not already NPA.

Sub-Standard Asset - NPA for up to 12 months.

Technical Write-Off - Accounting write-off that does not necessarily extinguish borrower liability or recovery action.

Waiver - Release/forgiveness of debt obligation under an authorised decision.

Wilful Default - Deliberate/censurable default conduct defined under RBI's wilful-defaulter framework.

Practice MCQs - Module 07#

Questions#

1. A normal term loan becomes NPA when principal or interest remains overdue for:#

A. More than 30 days
B. More than 60 days
C. More than 90 days
D. One year in all cases

2. "Out of order" is most closely associated with:#

A. Fixed deposits
B. Cash Credit / Overdraft
C. DICGC
D. UPI

3. A short-duration crop loan becomes NPA when overdue for:#

A. 90 days only
B. One crop season
C. Two crop seasons
D. Five crop seasons

4. A long-duration crop loan becomes NPA when overdue for:#

A. One crop season
B. Two crop seasons
C. 90 months
D. Ten years

5. Which statement is correct?#

A. NPA means the loan has zero recovery value
B. NPA is an asset-classification status
C. NPA always means fraud
D. NPA automatically waives borrower liability

6. An NPA may be upgraded to standard when:#

A. One token payment is made
B. Required arrears are fully regularised under the applicable rules
C. Borrower changes address
D. Bank stops monitoring

7. Which is NOT an NPA category?#

A. Sub-standard
B. Doubtful
C. Loss
D. Premium

8. A sub-standard asset is generally an NPA for:#

A. Up to 12 months
B. More than 10 years
C. Exactly 90 minutes
D. One crop season only

9. An asset becomes doubtful after remaining sub-standard for:#

A. 30 days
B. 60 days
C. 12 months
D. Five years

10. A loss asset should normally be:#

A. Treated as standard
B. Written off or 100% provided
C. Given zero provision
D. Converted into savings deposit

11. Provisioning primarily exists to:#

A. Hide bad loans
B. Recognise expected/identified loss
C. Increase deposits
D. Avoid capital requirements

12. Under current commercial-bank rules, secured sub-standard assets generally attract provision of:#

A. 5%
B. 10%
C. 15%
D. 100%

13. Unsecured portion of a doubtful asset generally attracts:#

A. 0%
B. 10%
C. 50%
D. 100%

14. Which SMA category covers overdue of more than 60 days and up to 90 days?#

A. SMA-0
B. SMA-1
C. SMA-2
D. NPA-L

15. SMA stands for:#

A. Special Mention Account
B. Stressed Money Asset
C. Standard Monitoring Advance
D. Security Management Account

16. SMA classification is mainly meant for:#

A. Early identification of stress
B. Deposit pricing
C. Monetary policy
D. Coin management

17. CRILC is related to:#

A. Large-credit information and stress reporting
B. Currency printing
C. Insurance premium
D. Mutual fund NAV

18. A stressed asset:#

A. Must always already be NPA
B. Can show stress before becoming NPA
C. Cannot be restructured
D. Is always fraudulent

19. RBI's Prudential Framework provides an initial review period of:#

A. 7 days
B. 30 days
C. 90 days
D. One year

20. Under the ICA framework, a resolution decision broadly requires:#

A. 100% of every lender in all cases
B. 75% by value and 60% by number
C. 25% by value only
D. Borrower alone

21. Restructuring means:#

A. Changing loan terms because borrower faces financial difficulty under a resolution framework
B. Converting every loan to deposit
C. Automatic waiver
D. DICGC payment

22. A technical write-off:#

A. Automatically cancels borrower liability
B. Is an accounting action and recovery can continue
C. Is the same as waiver
D. Is a deposit product

23. A waiver:#

A. Is identical to a technical write-off
B. Releases/forgives debt under an authorised decision
C. Is always required for NPA
D. Is a type of mortgage

24. Compromise settlement is:#

A. Negotiated settlement of dues under policy
B. RBI policy rate
C. Deposit insurance
D. Security creation

25. Which is NOT necessarily wilful default?#

A. Genuine inability to pay due to business failure
B. Default despite capacity
C. Diversion of loan funds
D. Siphoning of funds

26. Which can indicate wilful default?#

A. Default despite having capacity to pay
B. Deposit interest calculation
C. Savings account withdrawal
D. CRR maintenance

27. Wilful default and fraud are:#

A. Always identical
B. Different concepts that may overlap
C. Deposit types
D. Monetary policy tools

28. SARFAESI was enacted in:#

A. 1991
B. 1993
C. 2002
D. 2016

29. Under Section 13(2) of SARFAESI, the demand notice period is:#

A. 15 days
B. 30 days
C. 60 days
D. 180 days

30. SARFAESI is primarily concerned with:#

A. Secured-creditor enforcement
B. Inflation targeting
C. Deposit insurance
D. Currency note printing

31. A borrower aggrieved by SARFAESI measures can approach:#

A. DRT
B. MPC
C. SEBI SCORES only
D. GST Council

32. DRTs were created under:#

A. Recovery of Debts and Bankruptcy Act, 1993
B. RBI Act, 1934 only
C. Companies Act only
D. FEMA

33. DRAT stands for:#

A. Debt Recovery Appellate Tribunal
B. Deposit Regulation Assessment Tribunal
C. Digital Recovery Audit Team
D. Debt Risk Allocation Trust

34. IBC was enacted in:#

A. 1993
B. 2002
C. 2016
D. 2024

35. CIRP stands for:#

A. Corporate Insolvency Resolution Process
B. Credit Information Recovery Programme
C. Corporate Interest Repayment Plan
D. Central Insolvency Recovery Policy

36. The adjudicating authority for corporate CIRP is:#

A. NCLT
B. DICGC
C. RBI MPC
D. SEBI Board

37. The statutory base CIRP period is:#

A. 30 days
B. 90 days
C. 180 days
D. 10 years

38. The CoC is primarily associated with:#

A. IBC resolution
B. CRR
C. cheque clearing
D. deposit insurance

39. If CIRP fails, the corporate debtor may proceed to:#

A. Liquidation
B. Savings account
C. Currency chest
D. Repo auction

40. ARC stands for:#

A. Asset Reconstruction Company
B. Advance Recovery Council
C. Asset Reserve Corporation
D. Account Resolution Committee

41. ARCs are regulated by:#

A. RBI under SARFAESI framework
B. SEBI only
C. DICGC only
D. GST Council

42. Selling an NPA to an ARC:#

A. Automatically waives borrower's debt
B. Transfers the financial asset for resolution/recovery
C. Converts it into a deposit
D. Makes it standard automatically

43. Security Receipts are associated with:#

A. ARCs
B. Savings deposits
C. CRR
D. cheque clearing

44. A haircut in stressed-asset resolution means:#

A. Physical reduction of collateral size
B. Difference between creditor claim and accepted/recovered value
C. Loan becomes deposit
D. Interest stops permanently by law

45. Which sequence best describes deterioration and recovery?#

A. Standard → SMA → NPA → provisioning/resolution → recovery
B. Deposit → repo → coin → DICGC
C. UPI → NPA → CRR → insurance
D. Mortgage → inflation → savings → cash chest

Answers and Explanations#

1. C — More than 90 days.
This is the standard term-loan NPA rule.

2. B — Cash Credit / Overdraft.

3. C — Two crop seasons.

4. A — One crop season.

5. B — NPA is an asset-classification status.

6. B — Required arrears must be regularised.

7. D — Premium.

8. A — Up to 12 months.

9. C — 12 months.

10. B — Written off or 100% provided.

11. B — Recognise expected/identified loss.

12. C — 15%.

13. D — 100%.

14. C — SMA-2.

15. A — Special Mention Account.

16. A — Early identification of stress.

17. A — Large-credit information and stress reporting.

18. B — It can show stress before becoming NPA.

19. B — 30 days.

20. B — 75% by value and 60% by number.

21. A — Modification of terms because of financial difficulty.

22. B — Accounting action; recovery can continue.

23. B — Release/forgiveness of debt.

24. A — Negotiated settlement.

25. A — Genuine inability is not automatically wilful default.

26. A — Default despite capacity.

27. B — Different concepts that may overlap.

28. C — 2002.

29. C — 60 days.

30. A — Secured-creditor enforcement.

31. A — DRT.

32. A — Recovery of Debts and Bankruptcy Act, 1993.

33. A — Debts Recovery Appellate Tribunal.

34. C — 2016.

35. A — Corporate Insolvency Resolution Process.

36. A — NCLT.

37. C — 180 days.

38. A — IBC resolution.

39. A — Liquidation.

40. A — Asset Reconstruction Company.

41. A — RBI under SARFAESI framework.

42. B — It transfers the financial asset for recovery/resolution.

43. A — ARCs.

44. B — Difference between claim and accepted/recovered value.

45. A — Standard → SMA → NPA → provisioning/resolution → recovery.

Official Sources and Further Reading#

The module is based primarily on RBI, India Code and IBBI material. Current provisioning, recovery and resolution rules must be reviewed when the legal/regulatory framework changes.

Source 1 - RBI Master Circular: Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances#

https://rbi.org.in/scripts/NotificationUser.aspx?Id=12822

Used for:

• NPA definition;
• 90-day rule;
• CC/OD "out of order";
• agricultural NPA norms;
• day-end classification;
• income recognition;
• upgradation;
• sub-standard/doubtful/loss classification;
• provisioning;
• SMA categories;
• CRILC;
• stressed-asset Prudential Framework.

Source 2 - RBI Prudential Framework for Resolution of Stressed Assets#

June 7, 2019, incorporated into RBI's current IRACP master framework.

Used for:

• 30-day review period;
• resolution plan;
• ICA;
• 75% by value / 60% by number threshold;
• resolution before/after default.

Source 3 - RBI Framework for Compromise Settlements and Technical Write-offs#

https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12513

Used for:

• compromise settlement;
• technical write-off;
• Board-approved policy;
• independent approval;
• continued applicability of penal measures for fraud/wilful default.

Source 4 - RBI Master Direction on Treatment of Wilful Defaulters and Large Defaulters, 2024#

https://systemhealth.rbi.org.in/Scripts/BS_ViewMasDirections.aspx_id%3D12713%281%29.html

Used for:

• current wilful-default framework;
• ₹25 lakh threshold;
• identification/review procedure;
• reporting;
• consequences;
• guarantor treatment.

Source 5 - SARFAESI Act, 2002 - India Code#

https://www.indiacode.nic.in/bitstream/123456789/2006/1/A2002-54.pdf

Used for:

• secured-creditor enforcement;
• Section 13 notice;
• Section 13(4) measures;
• Magistrate assistance;
• DRT remedy;
• ARC statutory framework.

Source 6 - Recovery of Debts and Bankruptcy Act, 1993 - India Code#

https://www.indiacode.nic.in/indiacode/handle/123456789/1775

Used for:

• DRT/DRAT;
• debt adjudication and recovery structure.

Source 7 - Insolvency and Bankruptcy Code, 2016 - India Code#

https://www.indiacode.nic.in/bitstream/123456789/15479/1/the_insolvency_and_bankruptcy_code%2C_2016.pdf

Used for:

• CIRP;
• NCLT;
• moratorium;
• insolvency professionals;
• CoC;
• resolution;
• liquidation;
• statutory timelines.

Source 8 - Insolvency and Bankruptcy Board of India#

https://ibbi.gov.in/

Used for:

• current IBC regulations and amendments;
• CIRP process guidance;
• current legal-framework updates.

Source 9 - RBI Master Direction - Asset Reconstruction Companies, 2024#

https://systemhealth.rbi.org.in/Scripts/BS_ViewMasDirections.aspx_id%3D12669%281%29.html

Used for:

• ARC registration;
• acquisition of financial assets;
• asset reconstruction;
• settlement;
• security enforcement;
• management change;
• debt rescheduling;
• Security Receipt framework.

Source policy for this module#

Use:

• RBI;
• India Code;
• IBBI;
• Department of Financial Services;
• courts/official judgments where necessary

for legal and regulatory facts.

Do not use coaching websites as authority for:

• NPA thresholds;
• provisioning rates;
• SARFAESI procedure;
• IBC timelines;
• wilful-default rules.